Connecticut in Crisis: How inequality is paralyzing ‘America’s country club’

Introduction

July 26, 2018: This story has been corrected.

New Haven, Conn. — By July 2017, when the state of Connecticut was more than 50 days into the fiscal year without a budget, Angela Serrano had been living at the state-supported Careways Shelter for Women and Children for four months. Serrano was shocked to find herself there when just a few short years ago she had a career, a mortgage and the comforts of middle class life.

The shelter, at that time housing 10 families near New Haven’s historic Wooster Square neighborhood, would be closed by September. The nonprofit group running Careways couldn’t afford to keep it open while financial aid from the state was tied up in budget deliberations — but Serrano, 46, was able to secure an apartment in New Haven for herself, her 17-year-old son and a 9-year-old grandson.

After a futile search for a job there, Serrano found work as a health-care aide in Trumbull, a suburb in nearby Fairfield County. She started night classes at Gateway Community College at the end of May in hopes of earning an EMT license — the ticket, she hopes, to a better-paying, more stable job.

But despite the progress she’s made, Serrano and others like her share a sinking feeling that Connecticut, by some measures the nation’s richest state, is not working for them. It’s a feeling she shares with other working-class Americans who can’t understand why the current economic prosperity seems to be passing them by.

Everything feels like a struggle. Serrano commutes a half-hour over Connecticut’s famously congested roads in the used car she bought, but the job in Trumbull pays $12.30 an hour, more than many of the available jobs in New Haven. Her state rental assistance ran out in April, so Serrano has been cobbling together overtime to make up the difference.

She doesn’t think her two-bedroom New Haven apartment, behind an alley and up two flights of stairs, is worth the nearly $1,000 a month she pays. But rent is high all over Connecticut, and it’s a quiet place to read and write, with a park around the corner for her grandson.

“I focus on my home,” Serrano said. “With everything I’ve endured, it’s important to me.”

Serrano’s daily struggles are symptoms of a state in crisis. For decades, Connecticut coasted fat and happy off defense firms, insurance companies, and a handful of super-rich financiers who came for the manicured lawns and to escape the higher taxes of neighboring New York and New Jersey. But the good times have ended, and Connecticut has been caught flat-footed.

Blue chip companies like General Electric have either left or are threatening to leave. A yawning budget deficit continues to loom over the state, amplified by some of the nation’s most glaring economic inequality. Greenwich, home to hedge funders and Manhattan corporate titans, and the Norman Rockwell suburbs of Westport, New Canaan and Darien share few priorities with Hartford, New Haven and Bridgeport, gritty cities struggling with searing poverty and fiscal disaster. Connecticut’s political leaders must choose between what seem like equally rotten options: cut services, and push more burden onto the urban poor, or hike taxes, and risk repelling both the suburban rich who pay much of the freight and new businesses that might consider moving here. Put simply, Connecticut is in a bind with precious little room to maneuver.

Connecticut’s troubles are extreme but hardly unique. The recovery that has entrenched Connecticut into the haves and have-nots has been unequal in other regions as well – from Florida to California and down to Texas. As the stock market climbs but wages remain relatively flat, the Constitution State serves as a troubling bellwether of national priorities that seem to favor wealth creation for the few before investments in the broader economy.

From factories to finance

Connecticut’s early reputation was built on the reliable bedrock of manufacturing. The state’s industrious citizens made hats in Danbury, and forged brass in Waterbury; nearly every Wiffle Ball in the world still comes from Shelton. Samuel Colt invented and produced his Colt revolver in Hartford and defense contractors like Remington Arms — which once employed 17,000 — turned Bridgeport into a boom town.

Over time, Connecticut’s economy followed a familiar path, drifting away from manufacturing as companies found it cheaper to operate elsewhere. Remington fled Bridgeport for Arkansas by 1988, leaving behind a fire-prone empty building on Barnum Avenue, named after the famous showman and Bridgeport Mayor P.T. Barnum.

Not to worry, though. Defense contractors like Sikorsky Aircraft, insurance firms like Aetna in Hartford and white-collar behemoths like General Electric in the suburban office campuses of Fairfield County — some of them lured with tax breaks — kept the state humming and obscured looming challenges. More than 400 hedge funds managing over $750 billion between them now call the state home, in tony suburbs like Greenwich. The state doled out incentives like a $35 million economic incentive package to AQR Management of Greenwich and a $22 million economic development grant to Bridgewater Associates of Westport, the largest hedge fund in the world, in 2016.

And that worked. For a while.

But the Great Recession hit the state with frightening force. Connecticut’s economic output has contracted since 2008, and the population has shrunk to 3.588 million, about 14,000 fewer residents than its 2013 peak. General Electric left Connecticut for Boston in 2016 and earlier this year MassMutual announced it would close an office in Enfield that employs 1,500 people. The companies said they couldn’t attract young talent wanting an upscale urban lifestyle to troubled cities or placid suburbs.

What’s left: a bifurcated economy that produces wealth but doesn’t spread much of it out. Connecticut boasted the nation’s highest per capita income in 2017, at $70,121. From 2009 to 2015, the income of the top 1 percent in Connecticut grew by 22.9 percent while incomes for everybody else dropped by 1.8 percent, according to the Economic Policy Institute, a Washington, D.C. think tank. The institute ranks Connecticut the third most unequal state in the country, behind New York and Florida, in its most recent study.

Economist Mark Price, who worked on the Economic Policy Institute inequality study, said financial industry hubs in Connecticut and New York exacerbate inequality in those states, but he noted that disparities are present throughout the U.S. economy. Unemployment numbers are improving nationwide and since 2015, Price said, there has been “broader and healthier growth” that is more widespread. “But that doesn’t reverse the overall 36-year trends where a tiny fraction of the folks at the top capture a significant share of income growth.”

Inequality is especially stark in Connecticut’s cities, according to a Center for Public Integrity data analysis. The Center used 2016 Census data to measure the ratio between two benchmarks: the lowest combined income a household could earn while still breaking into the top 5 percent of household income and the highest combined income a household could earn while still falling in the bottom 20 percent.

The analysis showed the Bridgeport-Stamford-Norwalk metro area in Fairfield County to be the most unequal in the country, where households in the top 5 percent of income took home 14 times more than those in the bottom 20 percent. The nearby New York-Newark-Jersey City metro area is close behind, as households in the top 5 percent there earn 11 times more than the bottom 20 percent. Other metro areas cities among the top 10 most unequal as measured by the Center: San Francisco-Oakland-Hayward, where the top 5 percent earn 10.9 times more than the bottom 20, Miami-Fort Lauderdale-West Palm Beach (10.4 times more) and Houston-Sugarland metro area (10.24 times more).

In Connecticut, the New Haven-Milford metro area and the Hartford-West Hartford-East Hartford metro area also rank high on the inequality scale.

The findings don’t surprise Rev. Bonita Grubbs, the executive director of Christian Community Action, a nonprofit that provides emergency housing and other support for needy families in New Haven. “The optimistic way is to think the rising tide lifts all boats. The reality is the boat has a hole in it and there are some individuals who are not in that boat,” Grubbs said.

Unemployment is currently trending downward in Connecticut, just as it is nationwide, and some defense contractors like Electric Boat Shipyard in Groton and engine builder Pratt & Whitney in East Hartford are adding slots. But about half of the jobs created since the end of the recession are low-skilled, low-wage jobs in the retail and service sector. Many don’t come with benefits or stability or enough pay to live comfortably in a place that isn’t as pricey as New York City, yet has a higher cost of living than many other regions.

And some of the best jobs are gone for good.

“In Connecticut, financial services has been a major, major part of our economy,” said Joe Brennan, CEO of the Connecticut Business and Industry Association. “It got hit very hard [by the recession]. Those jobs went away and they’re not coming back.” Employment in Connecticut’s financial services sector has shrunk by about 11 percent since the Great Recession – about 17,000 jobs.

The Connecticut Business and Industry Association estimates there are 13,600 jobs open in the state in advanced manufacturing, but these positions require specialized training that Connecticut hasn’t done a good job bestowing on its residents.

These were the quandaries that were facing Michael Hankins, 43, at a recent job fair at the Margaret E. Morton Government Center in Bridgeport. Finding a job is hard enough, Hankins said, “but they don’t want to pay you what you’re worth.” Hankins served 18 years in the Army and “even that doesn’t help” find a job that pays more than $10 or $11 an hour, he said, hardly enough to pay for a decent one-bedroom apartment in Bridgeport.

Hankins left Connecticut in 2017 to receive technical training at a school in Texas that advertised to veterans. The school, Retail Ready Career Training, shut down after the federal Department of Veterans Affairs investigated it for fraud. Hankins earned an HVAC license but upon moving back to Connecticut found the credentials aren’t accepted here.

Fairfield County, where Bridgeport sits, is “supposedly the richest county in the country,” Hankins said, “but I don’t see it.”

People are feeling the squeeze even in super-affluent Greenwich, also in Fairfield County. “We have tremendous wealth, but it’s also a tale of two cities. There’s a growing number of low income people,” said Alan Barry, commissioner of social services in Greenwich.

Due to the outsized cost of living in Greenwich, Barry’s department uses 200 percent of the federal poverty level to determine who is eligible for services like public housing.

“To use the federal poverty level [to set benefit eligibility] is totally ridiculous. It’s outdated, antiquated and it’s just not useful,” Barry said. “There’s no consideration that this is Greenwich, this is Connecticut, this is the Northeast. The cost of living is way different here.”

Barry says a more useful metric for economic stress is the United Way’s ALICE budget, which stands for Asset Limited, Income Constrained, Employed, and in Fairfield County amounts to 300 percent of the federal poverty level. Barry said that while Greenwich has 1,214 households living at the federal poverty level, it has 4,549 households living at or below the ALICE threshold, or about 20 percent of Greenwich’s population of 62,359.

Taxes

Non-stop budget challenges and discomfort with Connecticut’s level of inequality has led to growing demand for what has become the elephant in the room: raising taxes on the wealthy.

Many politicians don’t even like talking about the possibility, for fear of pushing high earners out of the state. More than almost any state in the country, Connecticut relies heavily on personal income taxes. Its businesses pay some of the lowest effective tax rates in the country. In 2017, income tax produced 51 percent of the state’s revenue —but where it came from reflects the state’s broader challenges. In 2013, for example, 36 percent of Connecticut’s personal income tax revenue came from just 10 towns: places like Greenwich, Stamford and West Hartford, according to the Fiscal Stability and Economic Growth commission. Conservatives and cautious politicians see that concentration and fear the loss of a handful of ultra-wealthy individuals could spell serious trouble for Connecticut’s budget projections.

Connecticut has raised income tax rates for the highest earners three times since 2009. The state’s progressive wing says Connecticut can afford to further raise rates on the highest earners, who currently pay 6.99 percent, and still maintain lower rates than neighboring New York (8.82 percent) and New Jersey, (8.97 percent). Expanding the sales tax to include internet sales and services could generate another $1.5 billion, and business taxes, the progressives say, could increase without pushing wealthy individuals out.

But that opinion is far from universal. “High taxes and the fear of more taxation will continue to push people and businesses out of our state, further eroding tax revenues and jeopardizing core functions of government,” state Sen. Len Fasano, Republican President Pro Tempore from North Haven, and state Sen. L. Scott Franz, R- Greenwich, wrote in a 2017 letter to Democratic co-chairs of the Finance, Revenue and Bonding Committee.

“The reality is higher taxes are self-defeating right now,” said CBIA CEO Brennan. Brennan noted that Connecticut’s population has been shrinking, and many of the high earners leaving the state end up in Florida, he says, a state with no income tax.

Others scoff at the idea that people will flee Connecticut if taxes are raised. They point to a 2016 study by Stanford and U.S. Treasury researchers showing states would have to raise taxes by 10 percent to have “even a 1 percent impact on millionaire migration.” Meanwhile, Connecticut is home to more millionaires and billionaires than ever.

A 2014 report by on the impact of Connecticut’s taxes across income levels by the state’s Department of Revenue Services found that households earning less than $48,000 a year directly or indirectly pay nearly a quarter of their income in state and local taxes. Other recent changes will actually raise the tax burden on Connecticut’s lower income families. The biennial state budget signed in the fall reduced the Earned Income Tax Credit, a tax relief for lower income workers, to 23 percent of the federal credit, down from 30 percent. The result, according to Connecticut Voices for Children, amounts to a $25 million tax increase for the state’s lowest income earners.

“There’s this whole narrative of how Connecticut is failing and we can’t betray our billionaires because they are so important to our state revenues, but we’re actually losing working class and middle class and young people,” said James Bhandary-Alexander, an attorney who represents low-wage workers at the New Haven Legal Assistance Association. Connecticut’s political leaders, Bhandary-Alexander said, “are concerned about billionaires, but they aren’t concerned about people who can’t find work in Hartford, people who are deprived of opportunities in Bridgeport or New Haven.”

City life

Tax increases are often blamed for pushing General Electric out of Connecticut in 2015, the highest profile departure in recent years. Ultimately though, it was another, more fundamental issue that drove the company to Boston and to a state with even higher taxes. The company’s campus-like headquarters in Fairfield County “was a morgue,” Chief Financial Officer Jeffrey Bornstein told The Wall Street Journal, and the company moved to Boston to attract young talent more interested in vibrant city centers.

Connecticut’s cities are struggling with urban revitalization, and have a lot stacked against them. Connecticut’s towns and smaller cities are fiercely independent, leading to rampant duplication of services like 911 call centers. California has five; Connecticut has 110. Connecticut also provides less aid to local government than other states. In 2015, the state sent 24 percent of its revenues towards local governments, a third less than the national average of 36 percent. Municipalities overwhelmingly rely on property taxes, a particularly regressive form of taxation, to raise revenues. For smaller, more affluent towns, this system is not so bad. But major cities like Bridgeport, New Haven and Hartford are doubly disadvantaged. They cost more to run, but are geographically compact. And much of the territory within these cities is covered with tax-exempt properties held by nonprofits like churches, schools or the state government.

The state was supposed to make amends through Payments In Lieu of Taxes, or PILOT, to cities to make up some of the difference, but since its inception in 1969 the PILOT program has been consistently underfunded.

Connecticut’s disparities have a distinctly racial contour. In 2017, the Open Communities Alliance, a Hartford-based fair housing group, found that half of Connecticut’s black and Latino populations live in areas most lacking key resources like good schools and employment opportunities — areas that total just 2 percent of the state’s land area. Just 9 percent of the state’s white population live in these areas.

“After decades of changes in the industrial base as well as demographic changes, much of the property wealth is outside the city,” said Hartford Mayor Luke Bronin, a Democrat. Hartford, the state capital, consists of just 17 square miles, and about half of the land mass in Hartford is tax exempt. As a result, owners of taxable property face sky high rates, 74.29 mills on the assessed value of property, where one mill is equal to $1 in tax per $1,000 of the property’s value.

The city has a population of more than 120,000, down from over 170,000 in the 1950s, and provides many services used by neighboring towns: hospitals, universities and public land. A vivid example is found in the South Meadows section of Hartford on the Connecticut River, where a trash-to-energy plant burns waste from seventy nearby towns. The site is owned by the state and a constant source of frustration for environmentalists and public health advocates.

After decades of fiscal stress, Hartford was on the edge of bankruptcy last year. Connecticut Gov. Dannel Malloy struck a deal with the capital city in which the state would shoulder Hartford’s $550 million in debts, a commitment that could have taken as many as 30 years to pay off. In return, the state would monitor Hartford’s spending under a new Municipal Accountability Review Board. The General Assembly tried to revise that deal in May. The new proposal would have allowed the state to reduce aid to Hartford after five years, but it was vetoed by Governor Malloy in June.

But the underlying structural problems remain. Last fall, Bronin went on a tour of Hartford’s neighboring towns, from West Hartford to Wethersfield, to make the case for increased investment in the city. Neighboring townspeople were receptive, Bronin said, but recordings reveal they peppered Bronin with skeptical questions about the city’s labor contracts and the prospect of higher taxes in suburbs isolated from the city’s struggles. “It’s a tougher sell once you start talking nuts and bolts,” Bronin said.

Most everyone in Connecticut sees the divides: rich-poor, black-white and most especially urban-suburban, but the political will to bridge them seems lacking. Representation in Connecticut’s House of Representatives is based on population, but the largest cities like Bridgeport and Hartford have six members each, while representatives from the state towns and smaller cities make up a solid voting bloc in the 151 seat chamber.

The budget

It’s under these conditions that Connecticut has tried to address seemingly endless budget challenges. The state sets its budget in two-year cycles and in recent years, a pesky deficit and underwhelming tax returns have turned the budget process into a roller coaster of spending cuts, shortfalls and eleventh-hour adjustments.

In the good times, the State spent more year after year, up from $16.39 billion in 2005 to $25.55 billion in 2015 (not adjusted for inflation). But for decades Connecticut neglected to put money away to meet growing obligations in pensions and health-care benefits for state employees. Only three states, Kentucky, Illinois and New Jersey, had more severely underfunded pensions than Connecticut, which had only 41 percent of committed pension funds in 2016, according to research from the PEW Charitable Trusts. The state’s overall recent spending increases have mostly gone towards addressing those sorts of locked-in, long-term commitments.

The 2018 fiscal year started on July 1, 2017, but the General Assembly spent the summer and most of the fall struggling to craft a budget. The legislature reached a two-year budget compromise in October that retroactively covers the period from July 1, 2017, through June 2019. The deal included across-the-board spending cuts and narrowly targeted new taxes for agenda items like transportation funding; Malloy signed off with some reluctance, arguing that revenue projections were unrealistic and didn’t accurately account for planned future tax cuts.

The cuts were immediately unpopular. Among the trims: $91 million in reductions to municipal aid and changes which lowered the income threshold for HUSKY A, the state’s Medicaid assistance for the poor, from 155 percent of the federal poverty level to 138 percent. The budget also raised the eligibility requirements for the state’s Medicare Savings Program, which provides financial assistance to low-income Medicare enrollees to help them with premiums and deductibles. Advocates organized protests for much of the winter.

The legislature responded in January by delaying cuts to the Medicare Savings Program for six months. And then beleaguered lawmakers caught a break. The federal tax law signed in December closed a loophole that allowed hedge fund managers to accumulate profits offshore to avoid federal and state income taxes, resulting in a one-time $1.2 billion windfall for Connecticut as investors repatriated money previously stored overseas.

Connecticut’s General Assembly used the new money to pass a revised budget just hours before the legislative session ended on May 9. The new budget allocates $20.9 billion for the remainder of the two-year budget cycle ending in June 2019 and increases spending by about 1.6 percent over the previously adopted budget. The revisions tap into the windfall and pull from a reserve fund, providing a way to balance Connecticut’s budget for this year. The new budget also restores cuts to the Medicaid assistance and Medicare programs and nixes most of the reduction in municipal aid scheduled by Gov. Malloy.

The budget does manage to avoid major tax increases that the business community and conservatives feared would further drive away businesses. But the budget did not include concessions from the state’s unions that Republicans in the Legislature desperately wanted. The GOP sought to end collective bargaining for retirement benefits after the current union contract ends in 2027, giving the state Legislature more control. Republican lawmakers also wanted to remove overtime from pension calculations and freeze cost-of-living adjustments to pensions for workers who come on board after 2027. None of these changes were adopted.

Union leaders and progressives say organized labor has already made significant concessions to help deal with the budget crisis and that the pension difficulties stem not from overly generous contracts but from the state government’s failure to make prudent payments to meet its obligations. Gov. Malloy reached a deal with the State Employees Bargaining Agent Commission in 2017 resulting in $24 billion in savings through concessions from state employees like a freeze on cost-of-living raises and increased contributions to pension funds from workers.

“Public employees have stepped up to the plate time and time again to help close the deficit” said Larry Dorman, the communications coordinator at Council 4 AFSCME. “Too much of the discussion in Connecticut has been on austerity and disinvestment,” rather than generating new revenue from “modest tax increases, and closing loopholes that benefit big corporations.”

Malloy, whose second and final term ends in 2019, signed off on the adjustments. But once again, he criticized lawmakers’ lack of fiscal discipline. The budget adjustments restore cuts to health and human services, Malloy wrote in a signing note, “without making the accompanying difficult decisions to reduce spending in other areas of the budget in order to afford these benefits” — absent the benefit of one-time revenue lawmakers could lean on this session.

Connecticut’s reserve fund still had over $900 million at the end of the fiscal year in late June. That’s more than the state had socked away in recent years, but less than half what is recommended by state Comptroller Kevin Lembo.

And the future remains uncertain at best. The budget shuffling still leaves the state with a projected $2 billion deficit for the 2019-2020 fiscal year, according to Connecticut’s nonpartisan Office of Fiscal Analysis.

Back in New Haven, folks like Angela Serrano aren’t leaving, though she admits she sometimes thinks about it. She lived in Maryland during what feels like a previous life and even though the cost of living was just as high, the jobs paid much more, she said. Serrano often thinks of the other families in the Careways shelter last summer, those who didn’t have an apartment to go to when the shelter closed its doors. She wonders where they’ve gone.

Rosie Cima contributed to this report.

Correction, July 26, 2018, 12:15 p.m.: An earlier version of this story stated that the General Assembly revised the Hartford bailout deal. The General Assembly passed legislation to revise the deal, but Governor Malloy vetoed that proposal.